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LONDON (Reuters) – Babcock International’s proposed takeover of defense services company VT Group moved a step closer after VT caved in to shareholder pressure and agreed to discuss a deal to create a services powerhouse.

Deals

The two companies said on Thursday they had agreed the basis for an exchange of information, but added the terms of any transaction, including price, had not been agreed.

Analyst Harry Philips at brokerage Evolution said the move showed VT had responded to demands from shareholders, many of whom have urged VT to open its books to Babcock.

“This clearly is progress and is significant because it is a step forward and shows they have agreed some parameters,” he said. “It doesn’t suggest it is a full opening of the books, but Babcock are clearly now going to have access to information that they wouldn’t have had this time yesterday.”

VT shares were 0.8 percent up at 681 pence by 1535 GMT, while Babcock shares were down 3.5 percent at 516 pence.

“There has been a lot of pressure from VT shareholders for the company to at least explore the industrial logic of a deal,” said analyst Andrew Nussey at brokerage KBC Peel Hunt.

“Is it due diligence or just a look at some contracts? I think it’s due diligence and suspect Babcock will be able to find more synergies than the 27 million pounds ($40.7 million) they have already identified and could see them coming up with 40 million easily.”

ALL ABOUT PRICE

Nussey added that Britain’s Ministry of Defense, a major customer for both groups, would be unlikely to object to a deal given the cost savings a combined group could help it achieve.

“I think it’s all about price now (between VT and Babcock),” Angela Lascelles, joint managing director at OLIM Ltd, which holds 1.49 percent of VT shares, earlier told Reuters.

“Shareholders seem to be looking for at least 750 pence and I think (VT Chief Executive Paul Lester’s) attitude is if it is the right price he will accept it. That is my interpretation.”

Earlier on Thursday, VT — once a naval shipbuilder called Vosper Thornycroft and now a support services company — said it was walking away from bidding for service sector rival Mouchel ahead of a March 8 deadline set by the UK Takeover Panel.

Babcock, which maintains the Royal Navy’s submarines, had said a deal would be subject to VT withdrawing its bid for Mouchel.

VT’s Mouchel bid had raised hopes it could diversify beyond the defense industry but the group found itself the target of rival defense support services group Babcock with a tentative cash-and-shares offer valuing it at up to 1.29 billion pounds, or 715 pence per share.

VT rejected Babcock’s approach, saying it significantly undervalued the group and set its sights on an 800p per share offer. Yet some shareholders pressed for talks and VT’s third-largest shareholder, Scottish Widows Investment Partnership, said “significant shareholder value could be created” by a merger of the two businesses.

Some analysts and shareholders believe a bid of around 725 to 775p could be enough to seal a deal.

(Additional reporting by Matt Scuffham; Editing by Greg Mahlich and David Holmes)

($1 = 0.6640 pounds)